Put Option Explained

In the world of investing and trading, understanding financial instruments like options can help you navigate the market more effectively. Today, let’s explore into one such tool: Put Option.

What is Put Option?

A Put Option is the right to sell an asset at a specific price on or before a given date. The buyer of the put option is speculating that the price of the asset will go down and is therefore bearish. The put buyer is not obligated to sell the asset if the price rises.

How does a put option work?

Imagine you own shares of a company called XYZ, currently priced at ₹100 each. You’re worried the price might go down, so you decide to buy a put option as a type of "price insurance."

Buying the Put Option: You buy a put option with a strike price of ₹90, paying ₹5 per share for this option. This means you now have the right to sell your XYZ shares at ₹90 any time before the option expires in a month.

If the Price Falls: Let’s say XYZ’s price falls to ₹70. With your put option, you can still sell your shares at ₹90, avoiding the bigger loss you’d have faced if you had to sell at ₹70.

If the Price Rises: If XYZ’s price goes up to ₹110, you don’t have to exercise the option as you would not want to sell something at ₹90 that can be sold in the market at ₹110. You can let it expire and only lose the ₹5 you paid for it, while keeping the profit on the shares you own in the cash market.

In short, a put option protects you if the price drops but doesn’t force you to sell if the price rises.

Key Takeaways

Whether you’re a beginner or an experienced trader, incorporating put options can enhance your trading strategy and safeguard your investments in volatile markets

Disclaimer:This information is for educational purposes only. Trading in Futures and Options involves substantial risk and is unsuitable for all investors. Past performance is not indicative of future results. Consult a financial advisor before engaging in such trading activities.